A Home Inns hotel in Beijing. Home Inns & Hotels Management Inc is set to buy Morgan Stanley's 59 percent stake in Shanghai Motel Management Ltd. [Photo/China Daily]

Hotelier may buy Morgan Stanley's budget accommodation holding

HONG KONG - Home Inns & Hotels Management Inc, China's second-biggest budget hotel operator, is close to an agreement to buy Morgan Stanley's 59 percent stake in Shanghai Motel Management Ltd, according to two people familiar with the matter.

The Nasdaq-traded Home Inns is in advanced talks with Morgan Stanley and other shareholders and may sign an agreement as early as next week, the people said, asking not to be identified because the discussions are private. The deal may value Shanghai Motel Management at as much as $500 million, they said.

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Morgan Stanley is selling control of the budget hotel chain five years after its real estate fund first invested in the company. Non-star, non-rated hotels accounted for 95 percent of China's lodging industry at the end of 2008, making the business ripe for consolidation, said Credit Suisse Group AG in January.

Home Inns reported its net income fell 30 percent to 32.5 million yuan ($5 million) for the first quarter this year. On May 12, China's second-biggest branded budget hotel, 7 Days Group Holdings Ltd, reported that net income for the first quarter fell 25 percent to 4.3 million yuan from the same period last year.

Budget hotels

Shanghai Motel Management operates Motel 168, China's fourth-biggest branded budget hotel chain in terms of number of rooms with a 7.3 percent market share, according to Credit Suisse. The company also runs the Motel 268 premium brand.

The number of branded budget hotels in China jumped by an average 82 percent a year from 2000 through 2008, and their overall market share may rise from 0.9 percent at the end of that period to 5.5 percent in 2015, Credit Suisse said.

Noel Cheung, a Hong Kong-based spokeswoman at Morgan Stanley, declined to comment.

Early last year, Morgan Stanley planned to sell its stake through a public offering and decided to find a strategic buyer instead around autumn due to market volatility, one of the people said. Selling shares to the public may have also limited the amount it could offload, the person said.

Morgan Stanley received up to a $1 billion non-binding bid when it first started the sale process late last year, the person said.

The offers in the March bidding round came in lower as share prices of the Nasdaq-listed Chinese hotels fell, two people with knowledge of the matter said in April.

China Lodging Group Ltd, which operates the Hanting Inns & Hotels chain, also submitted a bid at the time, the people said.

Bloomberg News